REMEDIES AND THE NEW LEGAL SCIENCE



Contracts II – Spring 2000

Part I: Remedies and the New Legal Science 1

A. Law and Economics 5

1. Principles. 5

2. Pareto optimality. 5

3. Wealth maximization. 5

4. Coase Theorem Redux 6

5. Efficient Breach 6

6. Critique of Economic Theory 6

B. Remedies 6

C. Efficient Breach 7

Acme Mills & Elevator Co. v. Johnson 8

D. Specific Performance/Injunctive Relief 8

Lumley v. Wagner 9

Stokes v. Moore 10

City Stores Co. v. Ammerman 10

Campbell Soup Co. v. Wentz 10

E. Measuring Expectation I: Cost of Performance and Nonpecuniary Awards 11

Freund v. Washington Square Press 11

Jacob & Youngs, Inc. v. Kent 11

Peevyhouse v. Garland Coal & Mining Co. 11

F. Measuring Expectation II: Consequential Damages, Cover, the UCC 12

Consequential Damages. 12

Calculating Expectation Damages 12

Panhandle Agri-services v. Becker 13

Hadley v. Baxendale 13

Globe Refining Co. v. Landa Cotton Oil Co. 13

Kerr S.S. Co., Inc. v. Radio Corporation of America 14

Difference between forseeability and speculativeness: 14

Common Law/Rest. § 351: CD are those depending on “special circumstances” – categories are fuzzy and can be argued either way. 14

UCC four categories of damages 14

Cover 14

G. Measuring Expectation III: The UCC and the Idea of Lost Volume 14

Pre-Breach Expenditures 14

Lost Volume 15

Neri v. Retail Marine 15

UCC § 2-708(2). 15

H. Measuring Expectation IV: Losing Contracts 15

U.S. v. Behan. 16

Bush v. Cantwell 16

Tripple rule. 16

Kehoe rule 16

I. Measuring Expectation III: Reliance Investments 16

Albert rule. 16

J. The Cultural Costs of Economic Formalism: White’s Language and Culture of Economics 16

Part II: In Defense of Judgment – Mistake, Interpretation, and Legal Theory 18

A. Mistake and Misunderstanding 18

Misunderstanding 18

Unilateral Mistake 19

Mutual Mistake 20

B. Impossibility (a/k/a Impracticability) 20

Common Law rule 20

Rest. § 261: Discharge by Supervening Impracticability 21

Rest. § 266(1): Existing Impracticability 21

C. Frustration 21

Common Law Rule. 21

Rest. § 265: Discharge by Supervening Frustration 21

Rest. § 266(2): Existing Frustration 22

D. Legal Theory 23

Atiyah: Form and Substance in Contract Law 23

Dalton: The Deconstruction of Contract 24

Macaulay: Noncontractual Relations in Business 25

Horowitz: Historical Foundations of Contract Law 25

Atiyah: Judicial Techniques and the Law of Contract 26

Simpson: The Common Law and Legal Theory 27

Part III: The Uniform Commercial Code 29

A. Economic Analysis & Interpretation 29

B. The UCC 29

Definition 29

Purposes 29

Rules of statutory interpretation 29

Steps 30

Generally 30

C. The UCC Applied 30

Map of the UCC 30

Examples 30

Test Case: Anticipatory Breach 31

Battle of the Forms/Last Shot Rule 32

Open Quantity Term 32

Open Price Term 32

Part I: Remedies and the New Legal Science

Law and Economics – Remedies – Efficient Breach – Specific Performance/Injunctive Relief – Cost of Performance and Nonpecuniary Loss– Consequential Damages, Cover, and the UCC – Lost Volume – Losing Contracts – Cultural Costs of Economic Formalism

Law and Economics

1 Principles: The law and economics movement looks to the goal of efficient resolution (as compared to other overriding interests of interpretation and fairness). It treats values as rational preferences, assumes in general the relative equality of all (reasonable) answers, and seeks to structure legal rules so as to satisfy as many people as possible.

1 It is assumed

1 one is able to form one’s own judgments about what is most preferable

2 we all have a rational ranking of preferences from best to worst.

2 Immediate critiques:

1 Economic rationality is too demanding: we can’t really identify and rank our preferences this way

2 Economic rationality is too lenient: calls things that are considered absurd (or even offensive/unjust) by society to be economically “rational.”

2 A Pareto optimal state of affairs is one in which there is no way to make someone better off without making another worse off. If it is possible to make one person better off without making another worse off, it should be done. To do otherwise is wasteful.

1 An efficient rule will bring about a Pareto optimal state of affairs and obtain for people according to their highest ranking possible.

2 If there is waste, the state of affairs is necessarily not Pareto optimal.

3 A Pareto optimal state of affairs is not necessarily egalitarian – If A has 5 sandwiches and B-E have none, it is a Pareto optimal state of affairs.

4 Pareto optimality is sensitive to a person’s own assessment of her wellbeing (which doesn’t mean that testimony is wholly determinative), and presupposes unanimity where no one can be made better off without taking from someone else

1 i.e., that such a state of affairs is normative/what people would have done themselves.

3 Wealth maximization (Polinsky), a more difficult state of affairs to achieve, cares not about individual welfare, but rather about the aggregate wealth of a group.

1 All wealth maximizing states of affairs are Pareto optimal, but not all Pareto optimal states of affairs are wealth maximizing.

2 Why? Pareto optimality is sensitive to individual wellbeing, whereas wealth maximization is about the total wealth of community, distributive consequences be damned.

3 Consequently, wealth maximization can lead to more aggressive L&E proposals, and is often favored as a principle over PO (but not by Kornhauser).

4 Coase Theorem Redux: If bargaining is easy, resources will go to those who value them the most (an optimal distribution).

5 Efficient Breach:

1 A breach that makes one person better off, and no one else worse off.

2 Efficiency is the best option, all other things being equal (but cf White).

3 Expectation damages ensure efficient breaches.

4 Specific performance can also do this by providing incentive for parties to bargain around the decree and “buy” the right to breach.

6 Critique of Economic Theory:

1 Doesn’t account for imperfections in market/market failures

2 Not complex enough to deal with the real world

3 Not able to inquire about content of choices

4 People don’t always have clear choices

5 “The springs of human conduct” are subtle, variable and unknowable

6 People aren’t always rational about their choices

Remedies

Whereas tort law tries to put people in the position they were in before the injury, K law tries to give people what they expected, often making them better off than they were before.

1 The most common way to redress the breach is by providing value equal to performance: requiring BP to pay NBP enough so that NBP is no worse off than NBP would have been had BP performed. K remedies are compensatory, not punitive.

1 Expectation damages are designed to compensate injuries to NBP’s “expectation interest.”

2 Reliance damages recoup funds expended by NBP in reliance on the K.

3 Restitution damages redress injury by paying NBP for benefits conferred upon BP.

2 In general, remedies are guided by the Expectation Principle: law tries to put non-breaching party (NBP) in position s/he would have been in post-performance. Expectation damages are one way to implement the Expectation Principle.

1 There are two ways to calculate these:

1 ED = Lost Revenue – Saved Expenses (easiest)

2 ED = Lost Profits + Unrecouped Expenses

2 In practice, computing these figures may raise significant problems:

1 Estimating costs saved may implicate problems of proof; e.g., where cost-of-completion is indefinite, or when overhead must be allocated.

2 Determining benefits gained may also be difficult (if seller has an inexhaustible supply of widgets).

3 Three general limitations to availability of expectation damages:

1 NBP cannot recover for avoidable losses

2 NBP cannot recover for consequential losses unless they were foreseeable to the parties at the time the K was made.

3 NBP cannot recover for losses not provable with reasonable certainty.

4 NBP is almost always entitled to at least nominal damages (six cents or a dollar).

5 In principle , the value of performance is to be measured by its value to NBP, not its value to the reasonable man, since expectation damages should reproduce what NBP would accept as a release payment.

1 Value of performance = 0 if a perfect substitute is immediately available at no additional cost

2 Computing value of performance will be difficult where BP’s performance is not simply incomplete but defective: there may be a concern about compensating subjective assessments of the defect if the assessment appears to be substantively unreasonable.

6 In Tomato-Truck Hypothetical 1 (Ben pays $25 + $1 to rent truck, plans to sell for $28):

Expectation damages = $28 (amount Ben would have had post-performance)

Reliance damages = $26 (refund of amount spent in reliance on K, including $1 for truck)

Restitution damages = $25 (amount by which Sally benefited)

7 In Tomato-Truck Hypothetical 2 (Ben plans to spend an extra $15 and sell his sauce for $45):

Expectation damages = $30 (calculated either as

[$45 revenue - $15 expenses saved] or

[$4 lost profits + $26 unrecouped expenses])

Reliance damages = $26

Restitution damages = $25

Efficient Breach

1 If transaction costs are significant, and the parties can’t quickly agree on a release payment, the legal rule will affect the decision to breach.

2 L&E claims that sometimes it is desirable to permit breach, because if damages are set correctly, someone can be made better off without anyone being made worse off. All other things being equal, K rules should not deter efficient breaches.

3 The Expectation Principle trusts that parties can take their own interests successfully into account (assumes economic rationality). The Expectation Rule assumes that the would-be BP and Buyer 2 (rationally) will look out for their own interests, and thus requires the would-be BP to take the NBP’s interests into account/internalize them, inducing efficient (and only efficient) breaches.

|Buyer 1 (me) |Seller |Buyer 2 |

|Wants to make sue that breach puts me in |Assumed that they will be better off, or at least not worse off, in the |

|position I would have been in had K been |event of breach, or else they wouldn’t do it. |

|performed – by definition no worse off | |

4 Efficient breach will always result in Pareto optimality where a resource is being shifted to the party who values it most (Problem 2/Desk hypo). But presumably there are situations where breach is efficient but further improvements theoretically could be made without making anyone worse off.

5 Acme Mills & Elevator Co. v. Johnson, p.1061:

Because of breach by seller, buyer is better off than it would have been had K been performed, and is due no damages. Buyer and seller K a sale of 2,000 bushels of wheat at $1.03 a bushel. Seller breaches before date of performance when price soars to $1.16/bushel. On date of performance, price sinks to $0.975/bushel, and buyer is able to cover at market price. Buyer sues for the $240 excess profits recouped by seller.

Court considers the expectation principle and consequently awards Buyer nothing – no remedy is needed to protect it because it is in fact better off than it would have been post-performance.

Problem 2

I am willing to pay $270 for a desk. Many stores offer desks at that price. Phyllis Phurnit offers to sell you a desk she is building for $210, and you accept. Luke Lee offers Phurnit $300 for the desk. (Assume that nothing has been paid up front and that negotiation costs are zero.)

What is the minimum amount I will accept to release PP from the K?

$60, to put me where I would have been had the K been performed.

Willing to pay $270 – K price of $210 = $60 “profit”

If PP is unable to reach me (i.e., transaction costs are high), and the damage award would be $70, will she breach?

Yes, because costs of breach < benefits received by breach.

Breach: PP gets $300-$70 = $230

No breach: PP gets $210

What if the award would be $100?

No, because costs of breach > benefits received by breach

Breach: PP gets $300-$100=$200

No breach: PP gets $210

The $100 damage award prevents a Pareto optimal state of affairs and is therefore inefficient.

|Damages |Buyer 1 (me) |Seller (PP) |Buyer 2 (LL) |Result |

|$70 |Gets ED + $10 |Gets $300-$70 = $230 |Gets desk at desired price |Breach is P.O. and |

| |(desk + $10) |$230 > $210 |better off |thus efficient |

| |better off |better off | | |

|$100 |No change |No change |Keeps $300 |Breach would not be |

| | | | |P.O. |

Specific Performance/Injunctive Relief

1 Damages are the norm, but injunctive relief (including specific performance) is available only if:

1 Damages are an inadequate remedy

1 Value of performance is highly speculative:

Ks to sell art treasures

Ks that transfer corporate control

2 Money cannot buy a substitute (another aspect of “uniqueness”)

3 K is for a sale of land (although this rule is eroding)

4 Kronman: Wherever there is a healthy market for substitutes, we need only award BP the money with which to purchase one. Where no market exists, or where it is difficult to determine what an adequate substitute is, we depart from this process.

5 Schwartz: How do we know when a market substitute is adequate? What is a “desk,” anyway? If we really want to protect NBP’s interests, we should let NBP choose between specific performance and damages.

Objection 1: Costs to court associated with specific performance may be significant and will not be internalized

Objection 2: Strategic costs of bargaining problem will recur

- AND -

3 Injunctive relief is consistent with equitable considerations (i.e., considerations of justice and fairness).

In other words, where other methods are not sufficient to meet the goals of the expectation principle.

2 Equitable restrictions on injunctive relief are outside the purview of economic analysis, and cannot be the subject of its critique, but economic analysis can analyze the effects of these restrictions and determine the likelihood of the parties’ ability to negotiate a release.

e.g., pursuant to an ordered injunction, BP can either perform or negotiate a release payment with NBP.

3 Specific performance is the normal form of injunctive relief, but less complete injunctions may be granted when money damages are inadequate but specific performance would be unjust.

1 e.g., personal employment cases (equitable considerations preclude ordering someone to employ someone else, too much like slavery)

4 When are money damages inadequate?

1 Although the “adequacy limitation” on specific performance persists, the general trend is to liberalize the availability of specific performance.

2 Courts generally proceed by asking what kind of relief would be adequate to protect NBP’s expectation interest.

5 When might specific performance be denied even if money damages are not adequate?

1 If BP’s obligations are not defined with sufficient precision to permit issuance of a judicial order (although the court will use all available interpretive aids in an effort to specify BP’s obligations under the K).

2 If A’s own performance is incomplete.

3 If monitoring the decree is especially difficult for the court (although this ground is of declining importance).

4 If it entails binding people to personal relationships (e.g., employment Ks)

5 On generalized grounds of “fairness.”

6 On generalized grounds of “public policy” (where specific performance is against the public’s interest, as with a K for a hazardous waste dump).

6 Lumley v. Wagner, p.1075:

Although injunctions compelling personal performance will not be granted on public policy grounds, this restriction does not preclude issuance of an injunction prohibiting personal performance elsewhere. Famous opera singer Wagner breaches a K with Lumley wherein she promised not to sing for any competitors for the duration of the K. Lumley sues and is granted an injunction barring Wagner from performing anywhere but at Lumley’s theatre. The appellate court adds that the injunction protects both parties from a capricious (too low or too high) jury verdict as to damages.

7 Stokes v. Moore, p. 1079:

In order to enforce an anti-competition covenant: 1)the covenant must be supported by consideration that is not only valuable but “reasonably adequate”; 2) a damages remedy must be inadequate either because ∆ is insolvent or damages are not provable. Stokes’s open-ended employment K with Moore contains a clause prohibiting Stokes from working for a competitor for one year following the end of his employment. Stokes quits after 4 years and immediately begins to manage a rival company. The court upholds the granting of an injunction, finding that Stokes’s sustained employment with Moore constituted adequate consideration, and that damages were not measurable. The court adds that the possibility of a liquidated damages award (specifying amount payable upon breach), mentioned in the K, does not foreclose the alternative of injunctive relief.

8 City Stores Co. v. Ammerman, p. 1089:

Specific performance is appropriate where the speculative character of the K’d enterprise makes a damages award impossible and where the importance of specific performance to NBP outweighs the difficulties of its implementation. Ammerman agrees to commit to opening a store in City Stores’s planned mall so that CS can obtain zoning approval. Post-approval, CS refuses to give A the space. A sues for specific performance. CS argues that the K is too indefinite to be specifically enforced: neither the rental rate nor the floor plan was specified in the K. The judge disagrees, suggesting that the missing terms could be filled in by reference to extant leases between CS and other retailers.

9 Campbell Soup Co. v. Wentz, p. 1097:

Specific performance will not be granted where the K is to favorable to one party as to be unconscionable as a matter of law – “equity does not enforce unconscionable bargains.” Wentz agrees to sell his entire crop of a special variety of carrot to Campbell at $30/ton. On the performance date, the market price is $90/ton, and there is no market for cover. W sells some of his crop to L, who then sells them on the market, including to Campbell. The K contains a clause fixing damages at $50/acre if W breaches, and clauses allowing Campbell’s to reject carrots and prohibiting W from reselling the rejects without Campbell’s permission. The lower court determines as a matter of fact that replacements “were virtually unobtainable” at the time of breach, and the appellate court concludes that a damages remedy would consequently be inadequate to protect Campbell’s interests. Nonetheless, the court refuses to grant an injunction due to the extreme inequity of the K.

Problem 3

Winnie Wilkins has signed a 2-year K with James Joyce wherein WW agrees to perform exclusively for JJ, at least once a week, at $2000/performance. Kelly Kilmer offers WW a similar deal, but at $3000/performance. WW would like to breach, but under local law if she does, she will be prohibited from working for any other potential employer. JJ feels that the dispute has soured his relationship with WW. Assume that JJ expected $100 profit/performance, and WW cares only about money. What should they do?

WW and JJ should bargain around the decree and try to reach a release payment.

• JJ pays $2000/performance

• KK pays $3000/performance

WW will receive (new K price) - (release payment), so she will breach only if

a payment > $2000 can be negotiated.

WW and JJ will negotiate a release payment of at least $100 per performance:

$999 ≥ R ≥ $100

JJ gets $999 J gets $100

WW gets $2001 WW gets $2900

(If R = $1000, probably also OK b/k at point of indifference for WW)

The precise amount will depend on:

• negotiation strategy

• how much each party wants to reach agreement

• how much each party feels entitled to

• whether JJ feels satisfied in non-economic ways by the injunction.

Also, the strategic costs of bargaining may cause everyone to lose out.

Measuring Expectation I: Cost of Performance and Nonpecuniary Awards

1 One way of fulfilling the expectation principle is to grant the cost of (substitute) performance.

2 Freund v. Washington Square Press, p. 1113:

Injured party should not recover more from the breach than s/he would have gained had the K been fully performed. F contracted with WSP to publish his book. WSP breached, and F sued for specific performance, which was denied, and then for damages consisting of 1) the delay of his academic promotion; 2) loss of royalties; 3) the costs of publishing the book himself were he to do so. He won a $10,000 judgment based solely on the last item. The Court of Appeals reversed.

3 Jacob & Youngs, Inc. v. Kent, p. ?:

Substantial performance of a K may relieve BP from obligation to perform, and entitle NBP instead to monetary damages. K hired J&Y to build a residence and specified that a particular manufacturer’s pipe be used. J&Y built the house but substituted a pipe of equivalent quality, and K sued for specific performance (i.e., to rebuild the house). The court held that J&Y had substantially performed, and that any damage award should be measured not by the cost of replacement, but by the diminution in value of the building – next to nothing.

4 Peevyhouse v. Garland Coal & Mining Co., p. 1119:

When cost of performance (CP) is much greater than the change in market value (∆MV), and when value to NBP is speculative, many courts will limit award to ∆MV. (Also a way of reading Jacob & Youngs.) GCMC leases a farm from P for the purpose of mining it; included in the lease is an obligation to regrade the land. Restoration costs $29,000; the land is worth significantly less than $5000, and regarding would increase MV by $300. The Ps seek $25,000 in damages and a jury awards $5000 (why? who knows).

On appeal, the court vacates the damages award, reasoning that the law of damages will not permit the “economic waste” that would result where CP is grossly disproportionate to the results.

Problems with court’s opinion: Court defines “economic waste” as a situation where NBP is compensated above market value. But in so doing, it focuses on cost to BP and the “reasonable” user of resources, and not on actual value to NBP, as mandated by the expectation principle. L&E does not criticize parties’ values or delegitimize their perspectives. The Peevyhouse decision undercompensates parties according to their own preferences, and is by definition irrational and inefficient, since there are other solutions that would leave both parties better off.

The correct award would be NBP’s point of indifference between the restored land and a monetary award: what is the smallest amount NBP values as much as performance? Here, Ps have specified $25,000, which seems to overcompensate too much, but probably they could have been bargained down to a lesser amount.

If we suspect (as we might) that NBPs will use this rule to their advantage, asking for as high a figure as possible (say, $28,999), perhaps the best rule would be to order specific performance:

6 Would force parties to enter only into Ks they can (and intend to) perform

7 Would in this case entice mining co. to bargain around the decree to an efficient result: a) NBPs will take money over performance, and therefore b) mining co. will spend < $29,000.

1 One big problem with this hypothesis, however, is that if the parties (by this point especially) hate each other, bargaining may not in fact ensue.

Measuring Expectation II: Consequential Damages, Cover, the UCC

1 Consequential Damages (CD): damages incurred by NBP as a result of the breach plus a direct chain of consequences.

1 We distinguish between direct and indirect consequences out of a belief that people who enter Ks need to know what they are agreeing to.

1 Hurley v. Eddingfield: People should decide freely whether to take on an obligation, and they cannot do so without this knowledge.

2 Efficient decisions cannot result in the absence of full disclosure – people cannot make informed decisions if extent of damages is unknown.

e.g., Hadley: perhaps delivery co. would have chosen not to deliver the shaft, or have insisted on a release, or have charged an insurance premium.

2 Calculating Expectation Damages

1 Assuming that 1) K was winning/profitable; 2) only objective is to make money; 3) no incidental damages, how to calculate expectation damages?

2 2 questions:

1 How much money would I have received had BP not breached?

money BP was to pay me (purchase price)

money I would have made as a result of performance (sales of spaghetti sauce)

2 How much money did I save as a consequence of the breach?

obligations relieved (expenses associated with manufacture/delivery)

post-performance expenditures (ingredients for spaghetti sauce)

3 2 formulae:

1 EXPECTATION DAMAGES = Lost Revenue – Saved Expenses

works forward from the point of breach

easiest and most preferable method (although only when lost revenue is ascertainable)

2 EXPECTATION DAMAGES = Lost Profits + Unrecouped Expenses

works backward from theoretical post-performance position

in principle, using this formula, pre-breach expenses might be relevant to determining the size of an ED award

using this formula, forseeability rules apply to the revenue stream from which the pre-breach expenses would have been recouped, not to the expenses themselves

3 Consequently, Lost Revenue + Pre-Breach Expenses ( double-compensation, since “Lost Revenue” already includes the money NBP would have used to recoup pre-breach expenditures

3 Panhandle Agri-services v. Becker, p. 1134:

Panhandle has a K to purchase wheat from Becker in KS at a $17/ton profit; Becker breaches. P also has a K to resell the wheat in TX at a loss after shipping costs. Should the court, in awarding expectation damages under the UCC, take into account the TX resale? If so, how does that affect the calculation of damages?

The UCC classifies these damages as consequential, and P made no attempt to cover, so should be end of story. But, a complication ensues because P’s resale K was a losing one. What does this mean?

P’s lawyer will not argue a claim for the effects of the TX K because they are in fact losses.

P’s lawyer will, instead, try to make the saved expenses as small as possible; B’s lawyer will try to make them as large as possible.

P is being sued by the TX buyer, but it is possible that being sued is cheaper than performance, or that the TX buyer is in fact glad the K was breached because local wheat was cheaper than the K price.

4 Hadley v. Baxendale, p.1138:

Consequential losses are recoverable only if foreseeable to both parties at the time the K was made. Mill owner Hadley sends broken, irreplaceable shaft to manufacturer via shipper Baxendale – negligent delays in shipping result in loss of a large volume of business (12x price of shipping K). Trial court awards judgment for H.

Appellate court reverses, holding that only losses “such as may fairly and reasonably be considered either as arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the K as the probable result of it” are recoverable. To hold otherwise interferes with parties’ ability to deal with special circumstances through express contractual provisions. Court concludes that B might reasonably have believed that H had a spare shaft on hand, such that nothing would be lost by delay, and ordered a new trial.

5 Globe Refining Co. v. Landa Cotton Oil Co., p. 1144:

Holmes proposes a more restrictive rule: no liability absent express contemplation in words of the bargain. This is not the law, but it appeals to Holmes’s love of formalisms.

6 Kerr S.S. Co., Inc. v. Radio Corporation of America, p. 1152:

The extent to which any damage appears “natural” under the Hadley rule depends on the extent to which the promisor comprehends the transaction from which the damage flows. RCA negligently fails to deliver a message, costing K the failure of a business deal worth more than $6,000. The trial court delivers a verdict for K, but the appellate court reverses. Cardozo 1) noted that Hadley had been the rule of telegraph companies for many years; 2) suggested that this rule was taken into account when rates were set; 3) observed that it was much cheaper for senders, who knew what amount was riding on the message, to insure than transmitters, who can only guess.

7 Difference between forseeability and speculativeness:

1 Forseeability is prospective: whether or not BP knows what she is getting into

2 Speculativeness is retrospective: whether or not courts can determine the amount in hindsight

8 Common Law/Rest. § 351: CD are those depending on “special circumstances” – categories are fuzzy and can be argued either way.

9 The UCC divides damages into four categories:

• Refund

• K-market differential (Market Price at time of breach ) – (K price)

• Incidental Damages (Expenses caused directly by the breach and that would not have accrued but for the breach – not sufficient that breach caused loss of revenue used to cover an expense)

• Consequential Damages (Everything else, subject to 1) forseeability and 2) cover requirements)

10 Cover

1 UCC-innovated requirement that NBP make reasonable attempt to engage in a substitute transaction in order to recover CD.

2 If NBP can cover, cover price is substituted for market price in computing the K-market differential.

1 Note that the existence of a market price suggests a market.

3 Created to mitigate the harsh common law rule that if you pay a price higher than what is later determined to be the market price, it’s your loss.

4 Cover is theoretically efficient under the Pareto criterion – restores NBP to post-performance position (better off than under breach), although award is lower than CD when NBP is unable to cover

Measuring Expectation III: The UCC and the Idea of Lost Volume

1 Pre-Breach Expenditures: How do the rules about CD apply to expenses caused not by the breach, but by reliance on the K?

1 Pre-breach expenditures are consequential only when the revenue stream from which they would have been recouped was foreseeable. Whether or not the expenditures themselves were foreseeable is irrelevant.

2 If you give an NBP both pre-breach expenditures and lost revenue, you will double compensate, and put the NBP in a position better than she would have been in post-performance.

3 While it is tempting to think that pre-breach expenditures should therefore never be part of the equation, sometimes it is legitimate for an NBP to seek them, especially where it is difficult to estimate lost revenues/put a monetary value on the revenue stream.

2 Lost Volume

1 Definition: Theoretical “profits” on market-value transaction when seller would have had an extra sale.

2 Often difficult to conclude whether or not there was lost volume; sophisticated market analyses are devoted to this issue.

1 The Economist: in a well-functioning and efficient market, dealers will operate at peak capacity, and there will never be lost volume.

2 The Intuitive Version: the seller was able to resell because the product was in inventory, due to the unexpected breach, and could be delivered immediately.

3 Even if there was lost volume, it may be that this is already taken into account in the pricing of the product. If you return something that you bought, there is arguably lost volume, but a return policy is built into the purchase, so part of what you have paid for was the right to return. Normally, this is spelled out in the transaction, but if not, court will have to ask whether BP purchased a right to return with limited or no damages.

3 Neri v. Retail Marine is the first case to recognize lost volume damages (B breaches K for sale of boat, then sold to B2). But since no company had ever before sued a customer on a lost volume theory, we have to assume that the price of breaches was built into the price; CE thinks that the damage award was therefore unnecessary, since the company was recouping breaching losses through price increases.

4 UCC § 2-708(2) (Seller’s Damages for Non-acceptance or Repudiation) is not explicit about lost volume, but has been interpreted to say that a seller “loses volume,” even where a resale is made at the full K price, if supply is inexhaustible.

1 K-market differential will be inadequate in cases of lost volume, where each sale would have been at market price (such that K-market differential = 0) but would have involved a profit for seller.

2 Per EP, if seller has recouped some revenue from, say, selling good for scrap, damages should be offset by that amount, but don’t forget about costs thereby incurred.

Measuring Expectation IV: Losing Contracts

1 For a losing contract, most courts depart from the Expectation Principle.

1 Given that ED = Lost Revenue – Saved Expenses

2 In most of our cases (except Acme Mills), LR>SE…but where SE>LR, meaning that NBP would have taken a loss had performance occurred, what remedies are available to NBP?

3 Example: K to build a birdbath for $10. Construction company (C) discovers that actual cost of performance is $30 ($20 loss for C), but continues anyway. Owner (O), however, decides against having the birdbath (too expensive, will depreciate value of house), and breaches after C has done $5 worth of work, but before O has paid C anything. What remedy for C?

1 ED = LR – SE

= $10 - $25 = -$15 (i.e., no damages per Acme Mills)

2 U.S. v. Behan rule (Mississippi river bed case): Even if speculative whether or not this would have been a losing K, you can still always get reasonable cost of performance expenditures (a subcategory of Reliance Damages).

1 The assumption is that at the very least, you would have recouped expenses.

3 Bush v. Cantwell rule (flour contract): If you pay cash up front for performance, you are always entitled to Restitution Damages (a/k/a refund).

4 Tripple rule, on the theory that a BP surrenders right to use K as a defense, awards full reliance damages.

1 D = $5 (amount of work done in reliance on K)

2 Most jurisdictions will cap damages at K price (to do otherwise – to repay D even if greater than K price – is the Premium Tripple rule).

5 Kehoe rule awards a fraction of expenses incurred – i.e., prorates the loss.

1 Where D = damages

| | | |

|D | |Costs incurred ($5) |

| |= | |

|K price ($10) | |Total cost of performance ($30) |

So D = approx. $1.66

2 Difficult to work out a justification for this rule – can be difficult to compute costs incurred.

3 Accepted only in a minority of jurisdictions.

6 Both Tripple and Kehoe depart from the expectation principle: they know what position NBP would have been in post-performance and deliberately decline to put NBP there, instead putting NBP in a better position.

Measuring Expectation III: Reliance Investments

1 Albert rule: where profit or loss is speculative, the Behan rule is expanded to include non-COP reliance expenditures, but if K would be a losing one, rule adjusts to the expectation principle by reducing recovery accordingly.

1 If revenue stream is speculative and it is uncertain as to whether K would be a losing one, then the rule for reliance expenditures doesn’t change – full compensation is awarded, but

2 If it can be proved that the K is a losing one, expenditures that are not cost of performance will be reduced, down to zero if necessary, by deducting provable loss.

3 In other words, Albert adds a forseeability requirement: revenue stream from running machine must be foreseeable (whether reinforcement of factory foundation was foreseeable is irrelevant).

The Cultural Costs of Economic Formalism: White’s Language and Culture of Economics

1 White attempts to answer the Economist’s query: “All things being equal, ought we not to strive to make legal rules efficient?”

1 Whatever the merits of economic analysis in theory, in practice we will inevitably overstep the constraints necessary to make it theoretically defensible.

1 Specifically, we will forget the “all things being equal” part, because we are uncomfortable speaking in such terms.

2 Economic Analysis:

1 Defines all people as self-interested, even altruists, such that we lose a language for criticizing the overly self-interested;

2 Excludes the effects of growth and education on one’s list of preferences or the values on which the list might be based.

3 Supplies no mechanism for criticizing the content of choices

4 Is it okay to put all preferences at par, to say that the maximization of any preference = wealth (Mother Teresa maximizes her own preferences for altruism just as Warren Buffet maximizes his own preferences for money)?

5 Economics is not exactly the transparent, value-neutral language it claims to be

3 In comparison to economic language, White touts the virtues of legal language, which doesn’t attempt to create such a closed system and which has lots of questioning and examination of outside languages built into it.

4 White situates all of this into a theoretical framework of how language operates, but you can also think of it simply in terms of what questions are privileged – what society considers it most valuable to spend its time considering. His chief point is that we need to be self-conscious in this regard.

2 3 questions to ask of White’s analysis/claims:

1 Does analysis really create habits?

2 If so, are economic habits as bad as White suggests?

3 If so, are legal habits as good at White suggests? Doesn’t legal language also obscure and formalistically distort reality (see Atiyah)?

Part II: In Defense of Judgment – Mistake, Interpretation, and Legal Theory

Mistake/Misunderstanding – Unilateral Mistake – Mutual Mistake – Impossibility(a/k/a Impracticability) – Frustration – Form and Substance – Deconstruction of Contract –Noncontractual Relations in Business – Historical Foundations of Contract Law – Judicial Techniques/Construction –

The Common Law and Legal Theory

Mistake and Misunderstanding

1 Issues of mistake can be contemplated

1 in terms of offer and acceptance/was there a promise?: Holmes on Raffles: the putative acceptance didn’t truly meet the requirements of the mirror-image rule because the phonemes uttered didn’t have the same referent (goes to question of where meaning lies between self and other, etc.)

2 like unconscionability, as a reason not to enforce a promise: does mutual mistake as to how many ships Peerless sail the sees vitiate the K and render it unenforceable?

2 Rest. § 151 lists a variety of types of mistake:

1 Mistakes about the meaning of a word (Raffles)

2 Mistakes as to what one was signing (Miller, Ricketts)

3 Mistakes as to facts/circumstances surrounding the creation of the K (Swinton)

4 Mistakes as to future states of affairs (usually referred to under the headings of Impossibility or Impracticability/Frustration, § 261 et seq.)

3 Misunderstanding

1 Raffles v. Wichelhaus, p. 866:

K for cotton to sail from India to Liverpool on the ship Peerless, of which there are apparently at least two, one sailing in October and one in December.

How do you deal with the fact that the parties seem to have agreed to something specific (so no problem with the mirror-image rule) but in fact did not.

2 Rest. § 20 – Effect of Misunderstanding:

4 Unilateral Mistake

1 Swinton v. Whitinsville Savings Bank, p.93:

Termite case – announces rule of caveat emptor. Court refuses to have a special rule about termites in MA, where such infestations are rare. Why not? Because K law traditionally attempts to supply abstract, universal generalities, not dependent on transaction particularities.

(Caveat emptor is now rejected by many jurisdictions. See Rest. 2nd Torts § 551: It is a fraud for a seller to fail to disclose a known defect that cannot be discovered by means of a reasonable examination, whether or not the buyers asked specific questions regarding the possibility of its existence.

Whereas in mutual mistake both parties have come into court claiming no K, with unilateral mistake one party is fighting to enforce, one to void. With mutual mistake, remedy can be either to reform or rescind/void the K; with unilateral mistake, only option is to rescind/void.

2 Rest. § 153 – When Mistake of One Party Makes a K Voidable

If mistake does not go to basic assumption, no relief. If it does, still subject to § 154.

1 Rest. § 154 – When a Party Bears the Risk of a Mistake

In other words, party may void K unless the court decides that it is not reasonable… enormous discretion on the part of the court, and not much of a rule.

2 Rest. § 158 – Relief Including Restitution

Adds that if these rules “will not avoid injustice, the court may grant relief on such terms as justice requires including protection of the parties’ reliance interests.”

Does the Restatement read like doublespeak (Dalton) because it is constantly attempting to address particularities without referring to them?

8 Mutual Mistake

1 Wood v. Boynton (diamond or topaz?) and Sherwood v Walker (fertile or barren?) – mutual mistake voids K in Sherwood, but not in Wood. Are these cases reconcilable?

1 In Wood, delivery has already taken place – court interprets this as title having passed, whereas in Sherwood court concludes that title has not passed.

2 In each case, what was being contractor for?

Wood: a stone, or a topaz?

Sherwood: a cow (a/k/a an animal capable of reproducing) or a side of beef?

3 Each case cites Kennedy v. Panama as standing for the claim that the key issue is whether mistake goes to the substance v. a mere quality of the subject of the K.

this seems a radically determinate and therefore unhelpful dichotomy

4 Each court seems to pick the party it thinks should have born the burden of the mistake (i.e., applies a wholly substantive rule), with apparently unfair consequences:

Wood: burden falls on a woman without any expertise who found a rock

Sherwood: burden does not fall on ranchers who own the darn cow

5 In the end, the rule seems to be that D wins. Can’t get much more formal than that.

6 Nobody earned the increased value of the rock or the benefit of Rose’s fertility – this is a case of windfall.

Since there is no fair way to decide who gets a windfall, why not go the cheap and quick way, i.e., a formalism leaving the losses where they lie?

2 Rest. § 152 – When Mistake of Both Parties Makes a K Voidable

2 Again, a highly indeterminate rule

Impossibility (a/k/a Impracticability)

1 K cannot be completed at all (e.g., death or incapacity of person necessary for performance).

2 Whereas Mistake deals with facts as they existed at the time of K formation, Impossibility is about circumstances that change post-formation.

3 Common Law rule: If the subject matter of the K is destroyed through no fault of either party, K is usually rescinded.

1 Exceptions:

1 If a middleman Ks with a buyer and then is unable to procure the goods from his supplier, usually no impossibility found (and therefore no release from K obligations), unless that particular supplier was explicitly named in the K. Canadian Industrial Alcohol v. Dunbar Molasses.

2 Impossibility of a non-essential aspect of a K (e.g., mode of delivery) will not void the K.

Must use a commercially reasonable substitute.

3 If K does not specify performance by a specific person, then death or incapacity of expected performer will not render performance impossible; a commercially reasonable substitute performer must be used.

4 Rest. § 261: Discharge by Supervening Impracticability

5 Rest. § 266(1): Existing Impracticability

Frustration

1 Whereas with Impossibility BP is saying that she cannot perform, with Frustration the BP argues that it makes no sense to perform because what she will get in return does not have the value she expected at the point of K formation.

1 i.e., the raison d’être of the K simply doesn’t exist

2 Common Law Rule: The less foreseeable the event that thwarts the purpose of the K and the more totally frustrated the purpose of the K, the more likely a court will allow a frustration defense to nonperformance/ repudiation.

1 Krell v. Henry: Cancellation of the King’s coronation so unexpected and so completely thwarts the purpose of the K (P had rented a suite of rooms from which to watch the coronation) that frustration is a valid defense.

3 Rest. § 265: Discharge by Supervening Frustration

4 Rest. § 266(2): Existing Frustration

Legal Theory

The Economist addresses issues of confusion and error by acknowledging the difficulty of ascertaining preferences, but concluding that this is simply a case-by-case question of fact. Once the facts are determined, economic analysis kicks in to fill in the terms the parties would have wanted. But this doesn’t help in the truly hard cases, where these questions of fact are unknown and unknowable.

The difficulty in formulating an alternative to economic analysis is in creating and describing a theory that generally incorporates issues like gaps in understanding, confusion, etc….one that combines utility and methodological integrity. One alternative is the interpretative approach: can we learn more about what responsibilities the parties assumed by virtue of the relationship between them?

1 Atiyah: Form and Substance in Contract Law

1 Atiyah distinguishes between categories of substantive and formal reasons:

1 Substantive – go to the merits, consider fairness and justice to the particular parties

2 Formal – exclude from consideration at least some substantive reasons

signature is conclusive of consent (in general)

§71/consideration doctrine: presence of consideration is sufficient to render bargain enforceable (v. promissory estoppel)

3 Formalism gets a bad rap, but should be respected because:

Formalisms are cheaper than substantive evidentiary inquiries

Formalisms can improve the accuracy of some inquiries – if formalisms’ meanings are understood by society, less room for error than with a court inquiry

Formalisms encourage respect for parties’ autonomy – by approving certain provisions, you make your own law and keep the courts out of it

4 Misuses of formalism = formalistic reasoning

Essentially, formalistic reasoning is engaging in formal reasoning when you shouldn’t – the presumptions necessary to support a valid formalism are not satisfied either because no one took the substantive reasons into account earlier or things have changed and the formalism is now unrealistic.

It is always reasonable to make sure that the substantive reasons backing up the formalism still hold by taking a peek at the substantive reasoning behind it.

The peek Atiyah wishes us to take at the substance behind the formalism is somehow different than an outright substantive inquiry, but it’s not clear how.

5 Language itself is a type of formalism

We must presume the generally understood meaning for any given word

Mistakes inevitably arise when we try to interpret private languages

6 Atiyah draws parallels between legal and social formalisms

Marriage is a useful formalism that enables the making of certain decisions easily, but only if the institution of marriage is taken seriously by society.

7 Some legal formalisms are really just policy decisions regarding cost-effectiveness, convenience (on average, what works).

2 Dalton: The Deconstruction of Contract

1 Dalton is an exemplar of the Critical Legal Studies movement: a leftist, late 70s-early 80s skeptical examination of traditional legal doctrine.

1 CLE presents itself as a radicalization of legal realism, which itself says that in hard cases, judges will look to their own policy ideals, and we should face that fact.

L&E also inherits legal realism and suggests that economic analysis is the appropriate policy to look to.

2 CLE criticizes the indeterminacy both of legal doctrine and of policy concerns, and is especially critical with regard to the foundations of reason.

3 CLE’s problem is that it is crippled by its own skepticism and criticism of methodology – in the law, it doesn’t suffice merely to think about things differently, action is necessary.

2 Problems with formalisms:

1 Legal doctrines don’t resolve cases or produce decisions – they only legitimate them.

2 We need to look behind the doctrinal rationales to the political values in operation as a way of unmasking the legal process.

3 Dalton is skeptical of Atiyah’s support for formalisms – claims that formalisms inevitably will be formalistic.

3 Crucial claims of this article:

1 The two general problems preoccupying the law (or any study of governance) are:

Power: to what extent can you use others/be used

Knowledge: how can you truly know anything at all, especially what others are thinking, given the shifting, slippery nature of language (to Dalton, this means that everything is indeterminate)

Yet we do seem to function as if we had knowledge (e.g., judicial outcomes are often predictable), so does this really matter as more than a philosophical conundrum?

4 The three ways to read her concern with indeterminacy are (from least to most radical):

1 Formalism/hierarchy/use of legal concepts can get out of hand and obfuscatory

e.g., silence ≠ acceptance, except of course for all the times it does

2 Legal concepts get in the way of our intuitive sense of justice, and must therefore be examined critically; let’s be honest about our need/desire to fall back on policy when intention is unknowable.

3 All we can really hope for is enhanced self-consciousness, forget right and wrong – indeterminacy exists everywhere as the “unapproachable boundary between self and other.” K law therefore inevitably cycles due to its dualistic structure, mapped onto society dualisms/antinomies – this is the fact of K law.

K law purports to respect intention, but true intention is profoundly unknowable – the impossibility of ascertaining actual subjective thought is the problem of Knowledge.

3 Macaulay: Noncontractual Relations in Business

1 Posner suggests the creation of rules that give parties more incentive to do research on what is being bought and sold in an effort to avoid mistake. Risk should be put on the most efficient risk-bearer.

2 Macaulay dashes this aspiration by pointing out the limitations of legal formalisms’ influence on social behavior.

3 Given Macaulay’s finding that no technical (enforceable) K was created for upwards of 60% of all business transactions in his sample –will the creation of new legal rules (such as one imposing a burden on the expert in Wood) have any effect on businesspeople’s decision-making?

1 Macaulay finds that lots of business behavior utterly ignores K law, even (especially!) that which is contractual in nature, even where the rules are well-known and clearly contradict the behavior. Why?

Most Ks are performed – parties don’t expect to end up in litigation

A litigious reputation is undesirable within the closed universe of buyers and sellers

Goal is to reach agreement – suggestion of distrust and focus on risks is counterproductive.

4 Some of the conclusions of this article may become more dated as the business community becomes more culturally heterogeneous, meaning that certain assumptions can no longer be made/counted on.

5 What would Macaulay say to Posner’s suggestion of a formal rule putting the risk on the most efficient risk-bearer?

1 Probably that such a rule (1) wouldn’t be known, or (2) if known, would be ignored.

6 If legal rules rarely provide incentives to change behavior, what then?

1 Perhaps courts, instead of figuring out how parties ought to act, should try to adapt to actual practices; and

2 Focus on the retrospective nature of judgments v. prospective

4 Horowitz: Historical Foundations of Contract Law

1 Challenges the CL story of historical continuity, as manifested in precedent

2 Equitable theory: formerly, CL predilection was for an equitable theory of K:

1 Concept of an objective just price

2 Fairness/unfairness in dealings determined by community standards

3 Existence of a K is an objective matter, determinable based on common understanding within the community

4 Substantive notion of consideration to police fairness

5 Juries were permitted to make decisions based on the innate fairness of the deal

6 An implied warranty of quality – sound price implies a sound product

3 Will theory: present-day K law strives to respect the will of the parties and their freedom to K.

4 Historically, shift was/is manifested in:

1 Differing notions of consideration

Equitable – consideration is substantive

Will Theory – consideration is formal

2 Remedies: ED awards according to parties’ agreement/expectations

3 Implied warranty is abandoned and replaced by caveat emptor (is this accurate?)

4 Relationship between express and implied Ks: will theory privileges any express agreement over all claims of implied agreement; will of parties trumps values of court.

5 The will theory is simply a particular historical development and is not innate or necessary to K law (after all, K law was once very different). It is an economically driven, contingent feature of K law that emerged in connection with:

1 Economic developments – rise of commodities markets

2 Skepticism as to idea of “objective/intrinsic value”

3 Will theory is especially manipulable for the purposes of the commercial classes at the expense of employment classes (Horowitz implies a manipulation of K law to this effect).

6 Problems

1 Horowitz’s historical analysis presumes that during the “equitable theory” period, the community was closed and homogeneous.

2 Atiyah says that by using construction/implication, courts can (and do) import normative community ideas of fairness to determine what we believe was the will of the parties, muddying the distinction.

3 Is Horowitz’s contrast overdrawn? Promissory estoppel and the doctrine of unconscionability incorporates substantive equitable concerns. But it does seem true that where the parties’ intentions are clear, they are attended to by the courts, and that courts try to derive intentions if possible. Fairness seems to place the greatest constraints on the bargaining process.

5 Atiyah: Judicial Techniques and the Law of Contract

1 Again, what happens when the intentions of the parties are not clear? The L&E suggestion of creating rules that will assist future parties in making their intentions clear has been shown by the noncontractual relations of businesspeople to be inadequate.

2 This suggests, again, that the real issue is doing justice to the parties in the here and now. But a court looking retrospectively at the transaction through the lends of justice will get close to the equitable principle of old.

3 Atiyah remarks on the emerging technique of “construction,” courts implying terms (and entire Ks), necessarily making reference to equitable principles.

1 Questions about implied terms are treated as issues of fact, so if this trend is observed at the appellate level, it must be even more significant at the trial level.

4 This technique bridges the “gap” between the equitable theory and the will theory of K by importing equitable considerations in the form of the parties assumed or concluded intentions.

5 Whereas L&E assumes clear, uncontested obligations and then uses economic principles (efficient breach, lowest-cost risk bearer) to figure out how the parties would have filled in the “gaps” in the K, construction conceives of the issue as one of interpreting ambiguous obligations, and the task of legal inquiry as producing approximations.

1 Economic analysis must (even in its own terms) be recognized as parasitic on previous determination of obligations. It calls indeterminacies questions of fact, not requiring reference to outside values, but where questions are wide open it cannot help.

6 We can reconceive of almost every case as one about implied terms:

1 Wood v. Boynton: implied provision that if stone turns out to be very valuable, K is still good

2 Peevyhouse: implied remedy provision that if COP >>>ΔMV, remedy limited to ΔMV, or implied mistake provision addressing the mistaken assumption that regrading the land would not be economically wasteful.

7 There are 3 ways to decide any K case: liability, remedies. or implied terms. For example, with Savile (real estate market inflation case):

1 Liability rule: given a mutual mistake as to the state of the market, the court will rectify the K

2 Remedy rule: if you forfeit the deposit, you can walk

3 Implied terms: one or both of the above are implied terms of the K itself

8 Construction v. Rule-Based approaches:

1 Since both judges and juries have the ability to imply terms (of law and of fact, respectively), the ability to direct the issue to a different decision-maker does incorporate some flexibility.

2 May also be easier to argue interpretation of intentions via implied terms (as long as the term is credible) than the application of a doctrine that trumps intention (e.g., Mistake, Impossibility)

6 Simpson: The Common Law and Legal Theory

1 Simpson attempts to answer Dalton’s question: If all of these legal formalisms are themselves fact-specific, why do we see such consistency in judicial decisions?

2 Argues against a positivist notion of the common law as a cohesive set of rules “laid down” by an authoritative lawmaker, considering all the doctrines floating around with no obvious source.

1 He notes that a newer case is considered better authority than an older one, despite the fact that clearly the newer case had less to do with making the law.

2 Even leaving aside the notion of rules as “laid down,” the common law really seems to have an affinity for noncanonical principles – different legal authorities will describe the same well-accepted principles in entirely different ways.

3 Simpson explains the phenomenon of the convergence/predictability of the common law in the absence of express rules through the creation of a class of doctrinaire lawyers.

4 But Simpson’s theory doesn’t explain what to do in the face of discensus, where there is not common agreement among legal professionals, and offers no guidance as to how judges should decide in the face of controversy.

5 Consequently, Simpson’s legal theory is lacking…legal theory should fulfill 2 tasks:

1 Explain areas of convergence and the phenomena of settled areas/expectations, and

2 Acknowledge disagreement and explain what it means for a decision-maker to act responsibly (this is Dworkin’s project)

For example, when Cardozo writes his decision in Canadian Industrial Alcohol (the molasses middleman case), he makes certain assumptions about business behavior which are passed down to law students, creating a divergence between business law and business behavior.

Part III: The Uniform Commercial Code

Economic Analysis & Interpretation – History of the UCC – The UCC Applied

Economic Analysis & Interpretation

1 Economic analysis, in order to make claims about efficiency, requires:

1 Specification of an original state of affairs

2 Information about the preferences of the parties, especially specification of the rights and obligations of the parties.

2 That may work if there is a clear group division between facts and law, but if the obligations of the parties are fundamentally unclear, then the required state of affairs to run economic analysis isn’t present.

1 If all you can say about Ks in general is that they should advance the intentions/preferences of the parties, and the intentions/preferences aren’t clear, you are left with no values about Ks in general to apply.

3 If the point of a K is interpretive (i.e., meaning depends on interpretation, is a mixture of fact and values), then economic analysis will not work. Nonetheless, the benefits Atiyah observes to generalization/formal reasoning (cost savings, enhancement of accuracy, promotion of autonomy) are still worth reaching towards.

1 One approach is to look for values nuanced to particular domains, such as sales of goods among merchants ( Article II of the UCC.

The UCC

1 Article II deals exclusively with Sales of Goods

1 i.e., not with realty, securities/instruments, or services

2 The most successful of any of the uniform cods, promulgated to date in 49 states, with substantial revisions state-to-state.

3 Purposes include:

1 Enhancing uniformity and predictability

2 Tracking social behavior (v. changing it) and adapting law to the realities of commercial transactions

1 largely unbargained for, massive in scale, responsive to the needs of mass merchandisers

3 There is some tension between these purposes: insofar as norms in practice are fluid, may interfere with uniformity/predictability

4 Rules of statutory interpretation

1 Focus on words

2 Make statute a “pleasing whole”

3 Different words mean different things

4 Statute ought not to require specialized/arcane knowledge

5 No § should eviscerate effect of another

6 No § should duplicate meaning of another

7 Statute should treat likes alike

8 Statute should serve policy goals

5 Steps

1 Characterize the problem

2 Find the applicable section

3 Find the relevant text

4 Search for ambiguous words

5 Search for related provisions

6 READ THE PASSAGES SLOWLY

6 Generally

1 CL, if not inconsistent, remains in place

2 Parties are usually free to alter provisions by agreement

3 Quantity defines a sales K: UCC is tolerant as to open price, but not as to open quantity

4 Ranking of authorities:

1 Statute

2 Legislative History

3 Official Comments

4 Precedent

5 Scholarly Comment

The UCC Applied

1 Map of the UCC

2 Examples

1 Firm Offers: §2-205

2 Unconscionability: §2-302

3 Warranties: §2-312 through 2-316

4 Mistake/Impossibility: §2-615

5 Right to Inspect: §2-513

6 Modification of Terms: §2-207, §2-209

7 Availability of Cover: §2-712

8 Signatures: §1-102(39) (Definition), 2-201(2) (Requirement)

9 Mirror Image Rule: §2-207

1 Varying terms don’t vitiate consent unless they materially alter the K

10 Statute of Frauds: §2-201

1 If K for sale of goods for the price of ≥ $500

2 Unless within a reasonable amount of time a written confirmation is sent

3 Official comments:

Writing must evidence K for sale of goods

Must be authenticated

Must specify a quantity

11 Open price term: §2-305

1 Price fixed by a seller must be fixed in good faith

12 Reasonable time: §1-204

1 Depends on nature, purpose, and circumstances of the action

13 Seasonable time: §1-204

1 Within the time agreed, or

2 If no time agreed, within a reasonable time

14 Perfect Tender Rule: §§2-508, 2-601

1 Preserves CL rule that buyer is entitled to have goods meet specs exactly

2 But gives seller an opportunity to cure

15 Parole Evidence Rule: §2-202

1 Prior statements to a written K may not contradict anything in the K

2 But can be explained

By course of dealings, and

By evidence of consistent additional terms

3 …Unless the court finds the writing to have been intended to be a complete and exclusive statement of the terms of agreement.

3 Test Case: Anticipatory Breach

1 Under common law, a suit does not ripen until performance comes due.

2 UCC Provisions

1 §2-610: Aggrieved party may

a) wait and see for a “commercially reasonable time”

b) seek a remedy per 2-703 (Seller) or 2-711 (Buyer)

2 §2-711: Buyer may cancel, get a refund, and

a) cover and get damages per 2-712, or

b) get damages per 2-713

3 §2-713: Damages = Δ(Market price at time B learns of breach)(K price)

3 What is a “commercially reasonable time”?

1 2 3 4 5

the later we measure mkt. price, the greater the damages

repud. B files suit trial poss. 1 perf. due trial poss. 2

1 In most jurisdictions, a period of time short of before performance comes due, but some jurisdictions define “commercially reasonable time” as coterminous with the performance date.

4 Does “learn of the breach” = “learn of repudiation”?

1 Apparently not, since §2-723 seems to distinguish between breach and repudiation.

5 So when did Buyer “learn of the breach?”

1 When she learned of the repudiation?

pro: plain meaning

con: repudiation ≠ breach w/in UCC

waiting is bad; contradicts purpose of 2-610

inconsistent with EP & common law operating behind UCC

would render 2-723 superfluous

poses an asymmetry with 2-708 (re: seller’s damages); odd to treat buyer and seller so differently

2 Repudiation + a reasonable time?

pro: implements 2-610

con: doesn’t square with text of 7-213 (“learned of breach”)

asymmetry with 2-708 and 2-723

3 When performance came due?

pro: consistent with CL

consistent with treatment of seller

con: repudiation ≠ breach ≠ time of tender

does time of breach = learned of breach?

6 In general, commentators “agree to disagree.”

4 Battle of the Forms/Last Shot Rule

1 Last Shot Rule: a volley of incompatible forms followed by performance and payment ( clearly a K was observed by the parties, the question is how to interpret its terms: “last shot” prior to performance controls.

1 Compare to the Mirror Image Rule: a volley of incompatible forms followed by performance ( no K at all

2 Problems: This rule is (1) extremely unpopular in the business community, whose members are generally blissfully unaware of the form terms, and (2) arbitrary.

3 § 2-207 eliminates this rule and attempts to conform to actual practice.

5 Open Quantity Term

1 The UCC itself does not state explicitly that there must be a quantity term for a K to be enforceable. See §2-201(1): a writing “is not insufficient” if it contains mistakes/leaves things out, but it is not enforceable beyond quantity term, which ≠ must be a quantity term.

2 Official comment says this should be read to imply the requirement of a quantity term, but the comment is not the statute.

3 Nonetheless, since quantity is the most difficult term to fill in a sales K, most courts will not enforce without it.

6 Open Price Term

1 At CL, question is whether offer is sufficiently definite as to price to have formed the basis for a valid K.

2 §2-305 - Open Price Term: Possible to have a valid K with price left open, but parties must intend to conclude the K.

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$230>$210!

$200 ................
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